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Is refinancing worth it?

24/07/2020

Things to consider before deciding to refinance your home loan.

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For a lot of homeowners, refinancing can seem like an appealing way to better your financial situation. And that’s true – there are a lot of good reasons to refinance, including the chance to save money on monthly repayments, secure a better interest rate or free up funds to renovate. You can also refinance in order to consolidate credit card debt or personal loans.

However, refinancing isn’t something to rush into. It’s important to consider whether it’s worth the effort to go through with the process. That includes assessing where you’re at financially, scrutinising your current home loan and the interest rate you’re paying, and considering the lifespan of your loan.

It’s also a good time to be honest with yourself about your financial habits and practices, especially if you’re refinancing purely for debt consolidation. If you’ve come to the question of refinancing because you want to alleviate the pressure of other debts, you could also try talking to a financial counsellor for advice.

When you should reconsider refinancing

If you’re planning to sell the property or the value of the property has decreased substantially, it might not benefit you to refinance. Similarly, you might not want to refinance if your financial circumstances have changed, or if you’re facing a more unreliable source of income (i.e. you’ve recently moved from full-time employment to running your own business or freelancing).

Questions to ask before refinancing

Before you rush to compare lenders and the best interest rates out there, here are a few key questions to ask yourself about your current home loan situation.

  1. Are you happy with your current lender? A good relationship with your bank or lender can mean a lot – so consider whether switching to another institution is the right thing to do. For instance, if you like going into a branch to talk to your lender, switching to an online bank where communication is all via email or phone may not suit you.
  2.  How long have you had your mortgage? If you’re sitting on a decade-old mortgage, you may be paying for features you no longer use – and refinancing can mean taking advantage of new home loan products with an offset facility, split loan, redraw or other newer features. Just be aware that if you extend your new loan term, your repayments may be lower but you’re likely to pay more in interest in the long-term.
  3. What interest rate are you paying? Arguably the most popular reason to refinance is to secure a better interest rate – but how much better? Most lenders have website calculators so you can get an estimate on what your repayments would be and how much you could save – don’t forget to consider refinancing costs when working out if it’s worth doing.
  4. How much will it cost to refinance? Check your loan documents to see if you’ll pay any penalties to close your current mortgage early – for example mortgage discharge fees or break costs – and don’t forget to add up any costs for the new loan being created, such as loan application fees or bank fees. If all the costs are substantial, there may be no benefit in refinancing. Using tools like refinancing calculators might be helpful for helping you to look at your options.
  5. How much can you borrow? If you’re refinancing in order to borrow more money (perhaps to renovate or invest in other real estate) be aware that there may be limits on how much you’re allowed to borrow – and your income and existing debts will be taken into account. Try plugging your details into a borrowing calculator to get an estimate on your borrowing capacity.

If you’re refinancing to consolidate debt

Refinancing to consolidate debts can be a bit like ‘sweeping them under the rug’ – especially if you’ve struggled to stay on top of debts in the past. There’s nothing really to stop you running up new debts.

You should also consider the term of your debt. A personal loan term could be from 1 to 7 years compared to a mortgage with a term of up to 30 years. While refinancing your debt into your mortgage may mean you pay a lower interest rate, extending the term means you may be paying interest on that debt for a longer period. 

If you do struggle with personal debt and your credit cards are being maxed out, it can be worth seeking advice to help you create better financial habits. You can contact a financial counsellor or call the National Debt Helpline on 1800 007 007 for free advice.

This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication. We do not recommend any third party products or services and we are not liable in relation to them. Any links to third party websites are for your information only and we do not endorse their content.

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